Convergence between GDP(PPP) and GDP (Market exchange)
Convergence between GDP(PPP) and GDP (Market exchange)
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Particle king · External communityPost link
External question — Economics Stack Exchange
Author: Particle king
Original post: https://economics.stackexchange.com/questions/59139
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
Economic theory predicts that as countries grow, their currency should appreciate. In other words, their GDP at market exchange rates should converge with cost-of-living-adjusted GDP (PPP). To measure this, I plot the PPP multiplier, which I define as the number by which GDP at market exchange rates should be multiplied to obtain GDP (PPP).
As seen in the figure, the PPP multiplier does indeed fall with an increase in per capita GDP, indicating that GDP (ME) is converging with GDP (PPP). However, this convergence appears to have stalled in the 2010s, as shown in the second figure, and has even slightly reversed. One could argue that, in the case of China, the multiplier was already relatively low compared to its peers, suggesting a regression to the mean. But what explains the situation for India and Vietnam, whose multipliers were already high compared to their peers? Why is their GDP (ME) not converging?
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Quoted from Forex.com.bd-Editorial External question — Economics Stack Exchange Author: Particle king Source score (net votes, not local likes): 1 Original post: https://economics.stackexchange.com/questions/59139 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Economic theory predicts that as countries grow, their currency should appreciate. In other words, their GDP at market exchange rates should converge with cost-of-living-adjusted GDP (PPP). To measure this, I plot the PPP multiplier, which I define as the number by which GDP at market exchange rates should be multiplied to obtain GDP (PPP). As seen in the figure, the PPP multiplier does indeed fall with an increase in per capita GDP, indicating that GDP (ME) is converging with GDP (PPP). However, this convergence appears to have stalled in the 2010s, as shown in the second figure, and has even slightly reversed. One could argue that, in the case of China, the multiplier was already relatively low compared to its peers, suggesting a regression to the mean. But what explains the situation for India and Vietnam, whose multipliers were already high compared to their peers? Why is their GDP (ME) not converging?
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